Construction loans

[Mike Boyd]

BEWARE!!! It is almost universally accepted that values will continue to drop in most markets at least throughout this year. Contruction loans based on the value NOW will likely be upside down even before the house is finished. This means that when the house is completed and the owner wants to convert his construction loan to a regular loan, they will have to add cash for a smaller loan. I am doing a permanent loan right now where the original to be completed value was over $400,000. That was over a year ago. (I did not do the original report, thank God!) The value NOW is $345,000. This means the borrower will have to come up with +-$50,000 in cash over and above the new loan to pay off the construction loan.

 

[RSW]

We don't appear to have that problem here in East Tennessee right now. Our market is pretty stable. Soft, but stable. New construction is at its slowest pace since I have been appraising in 1995. I don't do a lot of construction appraisals. But, the ones I have done in the last 12 months are well supported with current sales.

 

[TJSum]

Another problem, many purchasers go with the builder's mortgage company because of the teaser incentives added. Many refi out to a better loan soon after settlement. With the declining market many new owners are finding they can not refi out of the higher rate builders loans because there is not enough equity left to qualify for the lower rate refi mortgages.

 

[Pat Butler]

Most construction loans require that the underlying land be paid off in full. So long as the house is being built in an area with decent land values then it's likely that there will still be enough upside as to not require any change in the end financing.

Land values around here can get as high as about 40% of the total value. So even in a declining market there's plenty of room to maneuver.

 

[lostinthezone]

With the declining market many new owners are finding they can not refi out of the higher rate builders loans because there is not enough equity left to qualify for the lower rate refi mortgages.

It's starting to become a real problem. I just did a field review of an appraisal for purchase of new construction. The original contract date for the subject was 4/07. At that time, the base price for the house was $589000. The appraisal had 2 builder sales from within the subdivision, one settled 12/07 and one 7/07 and one outside sale of an existing house that added no real value to the appraisal. The appraisal weights the builder sales the most and comes in at the sale price. Both of the builder sales contracted in early 2007. I pull some comps, do a site inspection, and talk with the sales agent for the office. I ask the agent what they're doing in terms of incentives, and she say's "Well, we take the base price, add in the options, and ask them to make an offer." The base price for the house is now $509000 and they havn't signed *any* contracts since the early summer of last year. The only things that have sold or had activity are foreclosures and short sales. Sad thing is the builder will probably be able to find them another lender that is willing to put them into this house already under water. For new construction, if you don't have something that contracted recently to compare it to, better beware....

 

[Mike Boyd]

Most construction loans require that the underlying land be paid off in full. So long as the house is being built in an area with decent land values then it's likely that there will still be enough upside as to not require any change in the end financing.

Land values around here can get as high as about 40% of the total value. So even in a declining market there's plenty of room to maneuver.

It doesn't worth that way here, Pat. The borrower will get an 80% loan based on the appraisal or the contract amount plus the land value, whichever is lower. The first draw on that loan is to pay off the land. Then payments on the construction in set phases.

 

[Tim The Enchanter]

they havn't signed *any* contracts since the early summer of last year.

Stop the race! Giant red flag! Could be a major wipe out.